SIPs or lump sum in ELSS: Which Is Better? (2024)

Equity-linked savings schemes (ELSS), better known as tax-saving mutual funds, are among the most popular avenues in the 80C basket of tax-saving investments. Section 80C allows you to claim a deduction of up to Rs 1.5 lakh from your taxable income. As you may already know, ELSS funds invest in equity and, if held for the long term, can prove to be more rewarding as compared to other 80C options.

Financial experts advise investing in these funds through SIPs throughout the year. That way, you will be able to average your investment cost and also reduce the impact of market volatility on your final corpus. Plus, you will be able to better plan your investments. Otherwise, you will have to arrange large sums of money around the end of the financial year.

However, the real investor behaviour is far from ideal. So, many of us indeed make our tax-saving investments around the end of the financial year or in a lump sum. How does this impact our investment outcomes? Let’s see.

SIPs vs once-a-year lump sums vs Jan-Feb-Mar investments

In order to understand how various modes of investing in ELSS funds impact the return experience, we conducted a study. We compared the returns generated by monthly SIPs, once-a-year lump sums and Jan-Feb-Mar investments in ELSS funds over the last seven, eight, nine and 10 years.

Monthly SIPs of Rs 12,500 each were made on the fifth of every month. Once-a-year lump-sum investments of Rs 1.5 lakh were made on 15th March every year.

Jan-Feb-Mar investments of Rs 50,000 each were made on the 15th of January, February and March of every year. Since the overall 80C limit is Rs 1.5 lakh, the study is based on Rs 1.5 lakh invested in a financial year in ELSS funds.

The charts ‘ELSS modes: Return comparison’ and ‘ELSS modes: Final corpus’ depict the returns generated by each of these across time periods. Here’s what we found:

• In terms of returns (XIRR), once-a-year lump sums and Jan-Feb-Mar investments have done better than monthly SIPs.
• However, in terms of the final corpus, monthly SIPs have done better. That means with SIPs, you had more money in hand.

What could be the reason for the latter finding? Recall the principle of compounding. With monthly SIPs, each of your SIP amounts gets more time to compound and hence the resulting corpus is higher.

Note: Monthly SIPs were of Rs 12,500 each. Once-a-year lump sums were of Rs 1.5 lakh each. Jan-Feb-Mar investments were of Rs 50,000 each. The total amount invested over seven years is Rs 10.5 lakh; over eight years, Rs 12 lakh; over nine years, Rs 13.5 lakh; and over 10 years, Rs 15 lakh. The above data is based on the category-average returns of ELSS funds as of March 2022.

What Should You Do?

Here are the key takeaways from this study:

First of all, do invest. As you saw above, you can do well even if you invest a lump sum once a year in ELSS funds. The reason for this is that Indian markets have maintained an uptrend in the long run, so if you just invested, you would have done well. Don’t forget the tax benefits you would have received, which would have enhanced your overall return experience. You can use ELSS Calculator to know the returns you would have earned by investing in ELSS schemes.

Even when the returns per cent with lump-sum and Jan-Feb-Mar investments is higher as compared to that of monthly SIPs, monthly SIPs can help you accumulate a larger corpus. That means more money in hand. So, more than returns, pay attention to the final corpus. See especially the data for the last nine years. Here the difference between the corpus obtained from monthly SIPs is greater by over Rs 1.7 lakh.

As stated above, monthly SIPs bring with them a lot of advantages. So, if you can help it, go for monthly SIPs. Regular SIPs instil discipline in investing and hence go a long way in helping you achieve your financial goals.

What’s more, ET Money could be your buddy in this journey. With ET Money, you don’t just get to invest in mutual funds without paying any commission but you also get access to many other financial products under one roof.